Euro zone inflation accelerates

European inflation accelerated to the fastest in almost three years in September on soaring energy costs, complicating the European Central Bank's task as it combats the region's sovereign-debt crisis.

The euro-area inflation rate jumped to 3 per cent last month from 2.5 per cent in August, the European Union's statistics office in Luxembourg said today. That's the biggest gain since October 2008 and in line with an initial estimate published on September 30th. Energy costs jumped 12.4 per cent in the period.

ECB council members have been weighing the threats of oil- driven inflation against the risk of the economy slipping into a recession as governments toughen austerity measures. While the central bank on October 6th kept its benchmark interest rate at 1.5 per cent, it also extended liquidity measures to banks to fight the crisis.

"We expect euro-region inflation to weaken over the coming months," said Jens Kramer, an economist at NordLB in Hanover, Germany. "The ECB will keep borrowing costs on hold this year and next and instead focus on unconventional measures."

Euro-region core inflation, which excludes volatile costs such as energy, quickened to 1.6 per cent in September from 1.2 per cent in the previous month, the statistics office said. In Germany, Europe's largest economy, inflation quickened to 2.9 per cent in September from 2.5 per cent in the previous month.

The ECB, which aims to keep annual gains in consumer prices just below 2 per cent, said last month that euro-region inflation would probably average 2.6 per cent this year and 1.7 per cent in 2012. Economic growth may weaken to 1.3 per cent next year from 1.6 per cent in 2011, it said.

ECB president Jean-Claude Trichet, who will be replaced by Italy's Mario Draghi when he retires at the end of the month, said last week that euro-region inflation is "likely to stay above 2 per cent over the months ahead" before easing. Risks to the price outlook are "broadly balanced," he said.

"All economic forecasts anticipate that inflation rates will peak this quarter and decrease in 2012," ECB council member Ewald Nowotny said on October 10th. "However, fear is justified on the development of the real economy."

The Frankfurt-based central bank said on October 6th that it would spend €40 billion on covered bonds starting next month and offer banks two additional unlimited loans of 12- and 13-month durations to help restore lending. The ECB has also been forced to purchase government bonds as European leaders struggled to toughen their response to the crisis.

The euro-region economy is showing signs of a deepening slowdown after expanding just 0.2 per cent in the second quarter. European economic confidence slumped more than economists forecast last month and manufacturing output contracted. German business sentiment also declined last month.

Euro-region exports rose a seasonally adjusted 4.7 per cent in August from July, when they advanced 2.1 per cent, Eurostat said in a separate report.

Exports to the US rose a non-seasonally adjusted 10 per cent in the seven months through July from a year earlier, while shipments to the UK increased 11 percent, today's report showed. Exports to China surged 22 per cent and Japan shipments climbed 12 per cent in the period. Detailed trade data are published with a one-month lag.

Bloomberg